S Corporations: What Are They?

An S corporation has all of the same corporate advantages as a C corporation, except that S corporations are taxed differently. Other than tax treatment, an S corporation is operated in the same way as a C corporation. An S corporation must follow the same corporate formalities as a C corporation. Like a C corporation, the directors and officers manage the operations of the S Corporation. Just like with a C corporation, the profits of an S corporation must be distributed per the stock ownership ratio (e.g. a shareholder with 29% of the shares, must get 29% of the profit).

After incorporating with the state, a corporation has up to 75 days to file IRS form 2553 and elect S corporation status. Some states (like California) also have S corporation applications that also must be filed.

The S corporation status, enables the shareholders to treat the earnings and profits as distributions and have them pass through directly to their personal tax return.

S Corporation Restrictions

Unlike C corporation and LLCs, there are restrictions on who can be a shareholder in an S corporation and how many shareholders an S corporation can have.

An S corporation can have no more than 100 shareholders. None of the shareholders can be C corporations or LLCs.

Differences between S Corporations and LLCs

Click here to learn the differences between S corporations and LLCs.

View a chart that compares C corporations, S corporations and LLCs